Today the Treasury announced that it sold its remaining shares in Citigroup, bringing its profit to a tidy $12 Billion (bailout details). Citigroup was bailed out twice, once on October 28, 2008 ($25bn) and again on December 31st, 2008 ($20bn). The total return from the two bailouts is about 27%. Sounds like Geithner invested the tax payer’s money well, right?

Not so fast. On October 27 the price of Citi stock was $11.73 per share. On November 21, the last trading day before the second bailout was announced, Citi closed at $3.77. Buying $25bn and $20bn of common shares at these prices would have resulted in something like a $15bn loss (not counting dividends). By this measure, the Treasury did well.

However, the Treasury presumably bailed out Citi because they know just how desperate they were. It took a few more weeks before the rest of the market caught on. When it did, the price of Citi shares dropped to as low as $1.03 (3/5/09) and it traded well below $3 for several extended periods. An investor would have had no trouble picking up stock at or below $3 and selling it around $4.00-$4.50. That is a 33-50% return, significantly better than what the Treasury achieved with our money.

Generating this return does not require picking the bottom or the top of the Citi stock price, just a commitment to buy when it is distressed, and sell when it recovers.

Stock purchases by retail investors do nothing to help companies like Citi survive, while bailouts do. It seems that the Treasury, with its much better information and the power to decide Citi’s fate, should have been able to strike a better bargain for the tax payer.

This particular bailout benefited everyone. Owners of City stock or bonds are rubbing their eyes, trying to figure out why their holdings are still worth something, the tax payer realized a handsome return, and so did investors who bet on the success of the bailout. The problem is that the distribution of the benefits favors the wrong parties.

The tax payer got 27%, a moderately successful retail investor got 33% or as much as 300-400% if they bought at the peak of the distress, and long-term holders of Citi stocks and bonds have lost much less than 100% of their investment.

A tax payer funded bailout should be structured to reward the tax payer before the gutsy investor and the gutsy investor before the long-term holders who funded and condoned the activities that got the bailout target into trouble. Unfortunately most of the bailouts enacted by the Bush and the Obama administration seem to reverse this order.